Vera Bradley, Inc. (VRA) Earnings Call Transcript & Summary

Hello and good morning, and thanks to each of you for being with us on today's call. Certain remarks we make while presenting, and when answering your questions, might count as forward-looking statements issued under — and as defined by — the Safe Harbor Provisions contained in the Private Securities Litigation Reform Act of 1995, as amended. Those forward-looking statements carry both known and unknown risks and uncertainties, and actual results could therefore differ materially from what we anticipate. For a look at the known risks and uncertainties, please see today's press release along with the company's most recent Form 10-K filed with the SEC. Investors should not presume that anything said on the call will still be operative at a later time. We assume no obligation to update any information discussed on today's call. At this point, I'd like to hand the call over to Vera Bradley's CEO, Jackie Ardrey. Jackie?

Thank you, Mark. Good morning, and I appreciate everyone taking part in today's call. Joining me today are John Enwright, who is stepping away from his role as our CFO, and Michael Schwindle, who has just been named to that position. Before we get started, I'd like to offer my heartfelt gratitude to John for the nine years he has given to Vera Bradley and for everything he has contributed to this company, and we wish him nothing but success going forward. We're glad to have Michael Schwindle on board, and he came to the company on May eighth. He brings deep retail experience, with more than 30 years in the industry, among them over 15 years serving as CFO, where he produced strong outcomes by improving profits and offering creative solutions. During the three years before he came to us, he was CFO at Claire's, a retailer of accessories and jewelry. Earlier in his career, he served as CFO at the specialty retailers Fleet Farm, Payless ShoeSource, Harry & David, and Musician's Friend, and also held other important finance positions at Home Depot and Limited Brands. You'll be hearing from John and Michael both later on this call; for now, let me discuss the quarter. We're quite happy that substantial growth margin expansion combined with careful expense management produced a notable bottom-line gain compared with a year ago in the first quarter. Turning to revenue, Vera Bradley factory stores faced difficult traffic patterns during March and April, which resulted in performance for the quarter that came in below what we had anticipated. Several bright spots elsewhere in our business partly made up for that, though. First, at Pura Vida we achieved our first quarter of positive revenue in five quarters, mostly fueled by sales at non-comparable retail stores. We likewise observed better year-over-year sales trends across both our Pura Vida wholesale and e-commerce channels. Second, we posted robust Vera Bradley e-commerce results and healthy revenues at Vera Bradley full-line stores. Vera Bradley indirect revenues fell, as we had anticipated, because of a key account order in last year's first quarter that will not recur, yet the underlying business is still sound; we are assembling a collaborative team focused on generating revenue increases over the long term, expanding growth margin, and maintaining strong financial discipline and cost control, which we believe will deliver profitable growth over the long term. The team is putting in hard work and taking strategic, proactive measures to steadily increase Pura Vida's revenues and to turn around the trends in Vera Bradley's factory channel by expanding targeted marketing programs that have tested successfully and are intended to boost traffic and average order size. At Pura Vida, we have a strong organizational structure in place, with Sujay Shah, recently promoted to General Manager, heading the team with greater discipline and attention to daily execution and to producing business results. Sujay previously served as Pura Vida's VP of Finance, and he is guiding the team to bring the e-commerce business back to growth by using the newly launched comprehensive customer data platform, diversifying the marketing program, enhancing site navigation, and concentrating on customer retention. When it comes to products, our custom bracelet initiative and the new friendship packs are a major priority and they're delivering results. We'll keep going after high-profile partnerships such as Sanrio, Harper Charms, and Crumbl Cookies, which fans always love. Work on Project Restoration kicked off in the first quarter, and it centers on four essential pillars of the business for every brand: consumer, brand, product, and channel, in order to generate the long-term profitable growth we're anticipating. To back Project Restoration and establish the groundwork for our success, we implemented further corporate changes and disclosed additional cost cuts, among them the removal of roughly 25 corporate roles, as part of a broader effort to further rightsize the company's expense structure. Naturally, Michael Schwindle's history of generating profitable growth, together with his enthusiasm for retail and operational excellence, will prove vital as the company carries out Project Restoration. We additionally implemented a number of organizational changes across marketing, e-commerce, product design, and product development that flattened and streamlined the organizational structure in order to boost execution, speed up decisions, and lend support to the four pillars of Project Restoration. These latest organizational changes plus reductions in non-payroll expenses should generate annualized savings of roughly $12 million, on top of the cost reductions we made in fiscal 2023. Let me walk you through a little more detail on the four essential pillars of Project Restoration and a few of the initiatives we have going right now. At Vera Bradley, on the consumer side, we'll concentrate on restoring brand relevancy, going after casual and feminine women between 35 and 54 years old who appreciate both fashion and function. On the brand side, we'll strategically market our distinctive and unique position as a feminine, fashionable brand that forms a deep emotional connection with consumers. On the product side, we'll refocus on the core categories and items we do best by innovating and expanding within our core products, such as travel and back to campus. We'll elevate our colorful, feminine heritage, keeping it distinctive while making it more trend relevant through refreshed print and design. We'll also innovate by introducing strategic, adjacent lifestyle items that make sense for our customers. As part of that, travel and travel accessories put up strong results across every channel in the first quarter, and the travel category will remain a key focus of our go-forward assortment. On top of that, our performance fabrics are trending well across every channel, with the core customer being younger and having a higher household income. This continues to be a big opportunity for us. Patterns will always be our signature, but coordinating solids remain a key opportunity for us too. We'll grow our solid collection this fall, including our return to a small collection of leather goods. Lastly, product collaborations remain an important element of our brand expression. Our Winnie-the-Pooh capsule was a massive hit. Our first Hello Kitty collaboration launched just this month. Our NFL collection arrives in August, right in time for football season. To wrap up on the channel side, we're going to speed up our push to be digital-first and strengthen where we show up online, create a footprint that's balanced and makes a sharper distinction between our full-line locations and factory stores, and go after and/or deepen ties with wholesale partners that fit our strategy. Related to that, the rebranding of our site along with the navigation updates we made recently have worked well — they've brought down bounce rate and lifted conversion and sales. Now shifting to Pura Vida: on the consumer front, we'll hone in on that carefree girl aged 18 to 24, the one that both younger and older girls look up to; for the brand, we'll bring our ethos back to its center around living life to the fullest, with marketing that genuinely shares real moments, places, and faces. Our Live Free campaign kicked off this month and it's going to highlight travel, adventure, friendship, and freedom, generating engagement and excitement among our customer base all summer long; when it comes to product, our aim is to deliver designs that are unique, fun, and playful, priced affordably and easy to get, with the biggest emphasis placed on bracelets and jewelry, plus other adjacent categories that are strategic. A couple of strong illustrations of that are our new summer collection along with our Harper Charms collection, and both are connecting with our customers. Last, on the channel side, we'll be heavily focused on getting e-commerce back to growth, which I mentioned earlier, and on growing wholesale by chasing bigger, more strategic partnerships and growing our larger existing accounts, while also refining the store model we already have; with that, I'll hand things over to John so he can walk through the financial results. John?

Thanks, Jackie, and good morning. I'd like to walk through several highlights from the first quarter. All of the figures I'm about to discuss are non-GAAP and leave out the charges described in today's release. For full details on what's excluded from the non-GAAP figures, plus a reconciliation between GAAP and non-GAAP figures, please see today's press release. Consolidated net revenues came to $94.4 million, versus $98.5 million in the first quarter of last year. Consolidated net loss came to $2.6 million, or $0.09 per diluted share, versus $6 million, or $0.18 per diluted share a year ago. Vera Bradley direct segment revenues came to $58.9 million, down 4.4% from $61.6 million a year earlier. Comparable sales fell 3.3%, mainly because of softness in the factory channel that Jackie mentioned earlier. Vera Bradley indirect segment revenues came to $15.4 million, down 9.4% from $17 million last year. Last year's revenues included a large one-time key account order that didn't repeat this year. Pura Vida segment revenues came to $20.1 million, up 1.2% from $19.8 million in the prior year first quarter, mainly driven by non-comparable retail store sales. First quarter gross margin came to $51.7 million, or 54.8% of net revenues, versus $52.5 million, or 53.3% of net revenues a year earlier. This year's gross margin rate benefited from lower inbound and outbound freight expense compared with last year and from sell-through of inventory that had previously been reserved, partly offset by more promotional activity. SG&A expenses came to $55.6 million, or 58.9% of net revenues, versus $59.4 million, or 60.3% of net revenues a year earlier. This year's expenses were below last year's, mainly because of cost reduction initiatives and the decrease in variable related expenses tied to lower sales volumes. The company's first quarter consolidated operating loss came to $3.5 million, or 3.7% of net revenues, versus $6.7 million, or 6.8% of net revenues a year earlier. Let's move to the balance sheet. Quarter-end cash and cash equivalents came to $25.3 million, versus $46.6 million at fiscal year-end. We had no borrowings on our $75 million credit facility at quarter-end. Total quarter-end inventory was $142.7 million, versus $161.8 million at the close of last year's first quarter. During the quarter, we bought 128,100 shares at an average price of $5.71 per share, for an aggregate amount of roughly $732,000. $27 million is left under the $50 million repurchase authorization that expires in December 2024. Now, let me hand the call to Michael to discuss the company's fiscal 2024 outlook.

Thank you, John. Hello, everyone. Taking into account how we performed in the first quarter, which both Jackie and John have already covered, along with the programs we have in motion and what we foresee from macroeconomic conditions, we're updating the outlook we provided for this fiscal year. Consequently, every piece of our forward-looking guidance is presented on a non-GAAP basis; here is what we now expect for fiscal 2024: Total revenues should land somewhere between $490 million and $510 million. Let me remind you that in fiscal 2023, revenues came to $500 million. For both Vera Bradley and Pura Vida, we anticipate revenues that are roughly flat when measured against the prior year. In addition, we're looking for gross margin rates in the range of 52.8% to 53.8%, versus 51.4% a year ago. Several factors should give a favorable boost to our fiscal 2024 gross margin rate: reduced freight costs compared with last year, efforts to cut costs, and sell-through of inventory we had previously reserved — though greater promotional activity will offset some of that benefit. We project SG&A expenses falling between $237 million and $247 million, which is down from $245.3 million a year earlier. The anticipated decrease in SG&A expense from one year to the next stems from initiatives across the company to reduce costs, with partial offsets coming from bringing incentive compensation back to more typical levels and added marketing spending meant to speed up growth in our customer file. Putting this together, we foresee consolidated operating income of $24 million-$28 million, against $12.3 million a year ago, and diluted EPS of $0.57-$0.67, assuming diluted weighted average shares outstanding of 30.7 million and an effective tax rate near 28%. Diluted EPS came to $0.24 a year ago. We further anticipate net capital spending of roughly $5 million, versus $8.2 million in the prior year, reflecting investments tied to new Vera Bradley factory stores along with improvements in technology and logistics. Given all this, we expect free cash flow of between $35 million and $40 million, compared with $21.7 million of cash usage during fiscal 2023. With that, operator, let's begin taking questions.

Morning, and I appreciate you fielding my questions.

Hi there, Joe.

Good morning, Joe.

Good morning.

To kick things off, you mentioned something about softer traffic numbers at Vera Bradley, I believe during March and April. Could you share a bit more context or specifics regarding what caused that?

Of course, Joe. First off, I'd like to note that the difficulties with traffic were confined, really, to the factory channel, and they happened mainly in March, I believe, when we saw a few other retailers reporting comparable pullbacks. What we did during this quarter was truly examine certain marketing initiatives aimed at bringing more shoppers into those factory locations. That's a piece of the reinvestment we plan to make over the remainder of the year — really, we achieved some positive test outcomes from a number of those initiatives to assist with growth in targeted markets. We will keep rolling out those initiatives. Once again, it truly was confined just to the factory channel. Traffic for our full line was robust in, all through the quarter.

Joe, the only thing I'd tack on there — and I believe Jackie handled it well — is this: as was mentioned, March ended up being the hardest month of the quarter, and we did see a bit of a bounce back. April was still negative, yet we did witness a recovery during April, stronger than March, and after that, in May, we've observed that same ongoing improvement, so.

All right. I'm not sure whether you've covered this previously, but perhaps you could provide some sense of the scale of that nonrecurring account order from last year, so we can get a clearer picture of the year-over-year performance excluding it.

Sure. Without that one-time sale for the key account order a year ago, indirect would have declined roughly 2%.

It's a bit above $1 million, as you know. All right, excellent. If I could ask one more thing, then I'll hand it over. Michael, congratulations on coming aboard. You've now been with us slightly more than a month, so it's still early. Could you perhaps share your first impressions and tell us what you're setting out as your initial near-term objectives here? Thanks.

Hey, Joe, thank you. I appreciate the question. Hey, given my days and days of experience, as Jackie and others have heard me say, this is an incredible brand; it has a really strong base here, a wonderful customer base, excellent brand recognition, which provides an incredible base to build from. Jackie and I have discussed that quite a bit. I'm really enthusiastic about it. Clearly, at the start, there's plenty to learn here, regarding every one of the various channels of the business, and also with the Pura Vida brand. As you can probably imagine, I'm rather steep on the learning curve, since I'm trying to absorb and grasp all of it; meanwhile, I've already gotten quite deeply involved in many of the cost initiatives Jackie mentioned earlier. Ensuring we have solid controls surrounding that and ensuring we have solid visibility into delivering those initiatives, plus gaining further understanding of the various parts of the business. I believe one of the benefits is that I've been around many different retail organizations. Over my 35 years, I've had many different operational experiences, and that makes it somewhat quicker, a kind of running start for me to jump into various areas of operations and other things, to kind of have a strong base at the beginning and then seek out the opportunities within the business.

Excellent. I appreciate that, and I'm eager to collaborate with you as we move ahead. Thanks once more for fielding the questions.

The same goes for me. Thank you.

Appreciate it, Joe.